AUD GBP Soars on Aussie Trade, BoE Interest Rates

AUD GBP Soars on Aussie Trade, BoE Interest Rates

The AUD GBP exchange rate was higher by 0.50% on Thursday, buoyed by strong Aussie trade figures and a dovish Bank of England. The BoE kept rates steady at 0.1% in defiance of the markets, who were expecting a hike to 0.25%.

The AUD GBP exchange rate was trading at 0.5470 after the recent news.

Strong Australian trade but fears of a peak

Australia’s trade balance was strong at a A$12.17bn surplus, which was lower than the A$12.24bn expected, but lower than the recent A$15.07bn.

The data was lower due to lower iron ore prices and exports after a recent surge in demand from India and China for minerals. That supply shock has ended and prices of commodities have pared their recent gains.

“Despite the large fall, this is still an extremely strong surplus and is the third highest on record,” says Adelaide Timbrell, Senior Economist at ANZ.

“…acknowledgement by the RBA that hikes are coming earlier than the previously signalled timeline, and the abandonment of of the 0.1% yield curve control target, are signs that a hawkish move can contribute to a re-steepening of yield curves. The question is whether the BoE and Fed can afford such a change of communication. In the case of the BoE, a hike would be a step in this direction.”

Australia’s number one export, iron ore, has begun a downtrend after weakening steel production and an economic slowdown in China. The price of iron has dropped back below $US100 a tonne having fallen by more than 20% over the past week.

Some analysts now fear that the peak is in and that the Australian dollar’s ‘fair value’ will drop.

“The peak in the trade surplus has passed, now that the iron ore price bubble has burst,” says Andrew Hanlan, Senior Economist at Westpac.

Meanwhile, final Retail Sales came in at -4.4% for the third quarter vs the expected 4.6% and prior 0.8% with sales down because of the recent government lockdowns. Traders are expecting a lift in sales as the nation moves out of lockdown.

Bank of England hurts rate hike traders with no move

The Bank of England voted 7-2 to hold its key interest rate at 0.1% despite upping their inflation target to 5%.

Traders had been betting heavily on a move to 0.25% after higher inflation and comments from policymakers, and the bank’s governor.

Investment banks such as Goldman Sachs and JP Morgan had expected a rate hike at this meeting and today has seen a sharp unwind in the 2-yr gilt market, alongside a drop in the pound sterling.

The central bank said “the Committee judges that, provided the incoming data, particularly on the labor market, are broadly in line with the central projections in the November Monetary Policy Report, it will be necessary over coming months to increase Bank Rate in order to return CPI inflation sustainably to the 2% target. There was value in waiting for additional information on near-term developments in the labor market.”